Hard Money Lending & Credit Scores

13 Replies

My girlfriend and I are about to form an LLC together for our flipping business. And although I have done several deals and rehabs pre-2008 (so it's been a while. lol), my credit is not that great right now. However, my girlfriends credit is phenomenal.

I have never had to use a hard money lender in the past, but we will be using them coming up very soon. My question to all those that are familiar with hard money lending requirements is, will we have a problem securing hard money loans (assuming the deal is a great deal) for our rehabs given that my credit is not great and that I am a partner in the LLC? Or should I not be an owner in the LLC?

We spoke to one hard money lender a couple months ago and he said that I should not add myself as an owner in the LLC because of my credit. Again, my girlfriend (the other partner in the LLC) has phenomenal credit.

And if you know of any hard money lenders that will work with our situation, please let me know their contact info.

Lastly, I do want to say that we have cash to put into our deals. So if there is a gap in our financing, we can cover this along with any contingencies that usually arise during rehabs. 

Any guidance in this area will be greatly appreciated. Thanks in advance!

Brandon & Tonya

@Brandon Mix Hard money loans give greatest consideration to the asset and the experience you have to develop the asset. If your credit is not great it may influence a little but they care mostly about your ability to flip, skin in the game, and the margin you have to make a profit and pay them back. I would personally suggest using a broker to facilitate your first hard money loan but find out how they are paid. Do they charge over and above for does the HML pay them. For example lendinghome and a lot of the major hard money lenders in the country will take discounted points if you use a broker to facilitate the loan but you will still end up paying more, because you want to make sure it goes through smoothly if you are on a tight time frame. If you are not on a tight time frame to close then I would not use a broker but considering most of time hard money loans are involved with cash offers I am making the assumption you probably have 2-3 weeks to close. To give you a specific example of hard money lender we used, lendinghome would have charged 3 points on the same deal, but because a broker we paid 4 points total, in which 1.5 went to broker and 2.5 went to lendinghome. Once you have done a deal with any of the HMLs your profile is loaded into their system and the underwriting process is cut by 5 days so you should be able to facilitate the deal yourself and you will also know the flow of what they will request. Another thing to consider is whether you want to use a HML in your time zone. If you working with a HML on the east cost that could make it easier because if they request information you need you could done before you go to work if you have a W2 job. If you are available at all times I would definitely go with an HML in your time zone as it also makes it easier working with the title company where everybody in on same business hours.

Most hard money lenders will want to run a credit score on any member of an LLC who owns more than 20% of the company. Some will also allow you to leave your wife as the sole guarantor, with a letter written by the other members acknowledging that you are aware a loan is being taken out under the llc name. long story short you should be fine

@Casity Kao , thank you for taking the time to respond in great detail relating to my post. It was very helpful. I see that there are some HML that will, like you said, focus more on the asset than the credit score. I just spoke with a HML and she confirmed a lot of what you said. But at the same time, because of my credit, we could potentially pay little bit more in interest. So I'm thinking that I am going to leave myself out of the LLC for now. And once my credit improves, we can always add me in.

@Tarik Turner , thanks for your response. I agree, it seems as though I will be find having me in the LLC, but like I mentioned above, we're going to just leave me out of the company for now. We'll end up saving a little bit in interest rate.

Thanks again for your suggestions.

@Brandon Mix Once you do a few deals credit issues affecting rate go away.  If you have a really good deal you will always find private financing.  Keep networking and you’ll find them.  After this post I had alot of hard money brokers private message me so I did want to point out we have not used a hard money lender in a long time because we paid our dues and established a reputation that finding private lenders is not an issue.

@Casity Kao , what is the profile of the private lenders that you're finding? Other investors that have made a lot of money and don't want to deal with rehabs, etc? Did you find them thru BP or a local REI?

Thank you.

954-805-4616

@Roy Gutierrez Join Metro Detroit Real Estate investors facebook group. Once you join that group you will not need BP. That is a good start and go to the meetups in Troy for the group. There is no profile of the typical real estate investor that lends but if I had to put the two categories, it's investors that are very seasoned that still want to be part of the game yet may not want to hustle like they did when they were younger and the future was uncertain and W2 corporate investors that have large self directed IRA and solo 401ks to lend off of. There really isn't just one type, all that matters is you build relationships.

Thank you @Casity Kao ,

I started going to the Renegade Investor meetings and for the first time the REI in Troy, actually going this Saturday to the presentation about private money from Allan Cowgill. I'm starting to network with different people. I didn't know about the Detroit Real Estate facebook group, I'll look for it thank you.

It seems the path is first try to get your own financing, if that doesn't work the hard money lenders, once you have a good amount of deals under your belt and a good reputation then the private money lenders will be interested.

954-805-4616

@Brandon Mix -- It depends. How bad is your credit? Any judgments, liens, foreclosures, bankruptcies in your past? If yes, how long ago?

Hard money lenders tend to care mostly about your experience in the space and the asset. But if there are overwhelming red flags in your credit report/background check, then their guidelines may preclude them from lending to you.

And, like others have mentioned, some lenders won't underwrite to you if you own less than 20%. 

While your low credit, like you mentioned, may cause your rate to go up, it shouldn't be so high that you feel uncomfortable with it. As others have mentioned, if you have a good deal you will be able to find a lender for it, so don't feel like you have limited options.

Brandon,

You can be a member of the LLC and not have your credit pulled or be on the loan docs. If you structure the operating agreement as you being less than 20% owner, there is no credit pull or loan docs to sign - only your girlfriend will sign. And, the good part is your liquidity can count towards qualifying.

@Brandon Mix Hey Brandon, great to hear you're back in the game of investing! As a local lender in Southern California, you'll be fine securing capital whether or not you have ownership in the business entity you are creating. It will make funding easier to stay off documentation though if you've recently gone through a foreclosure or bankruptcy.

Yes, hard money lenders will check credit, but if you have a co-signor with superior credit that will help sway underwriters in favor of lending. Hard money loans are primarily asset based, but each lender will put weight on different factors. We'll also consider investment experience and cash contribution to a deal when determining the rate and risk of each loan provided. 

As long as you have decent cash to bring to the deal and/or experience flipping this shouldn't be an issue.

Hey @Brandon Mix , I lend hard money in CA and although we do run  your credit, it's doesn't make or break the deal. We lend based on the equity of the properties and on your ability to flip and whether or not you have skin in the game like @Casity Kao mentioned. My company prefers LLC's but almost always requires you to sign as a guarantor to secure the investment.

I'd be happy to discuss further if you're interested. 

A bit late to the party here, but I wanted to chime in with my experience and how my company underwrites.

Most people can find a lender where you can get around it by reducing interest in the company below 20%, or removing yourself from the company.

I believe our underwriters have a unique approach. Our applicant (person) only has to be a member of the LLC/Inc we are lending to, their ownership percentage is unimportant. We also don't care about anyone else in the LLC, unless we are using their individual assets or experience to help the deal qualify - but we don't need to pull credit if we are doing so. We just don't lend to individuals who have had a bankruptcy in the past 3 years.

example... a 1% member with a 700 credit score would be the only person underwritten (and therefore only member we pull credit). 

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